What is Keynesian Theory of Inflation?

Simranjot

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According to the Keynesians, inflation occurs when aggregate demand for final goods and services exceeds the aggregate supply at full (or nearly full) employment level. The Keynesian approach differs from the monetarist approach in the following manner.

(i) Both the approaches regard potential output as given with the difference that whereas in the monetarist approach, the actual output is always equal to potential output, in the Keynesian approach potential output serves only as the notional short run maximum of feasible output.

(ii) Whereas in monetarist approach, excess increases in the quantity of money is responsible for increases in the price level, in the Keynesian approach, the excess increases in the total expenditure (e.g., investment expenditure and government expenditure) are the source of excess demand and hence inflation.

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